Why Fed interest rate hikes are good for Asia
William Pesek says regional economies should take the opportunity to implement vital reforms to retool, now that the retreat of easy money is exposing critical inefficiencies
Janet Yellen has suddenly been cast as a global villain. In Washington, Donald Trump’s surrogates complain that the Federal Reserve chair’s rate hikes will kill growth. In Asia, officials from Beijing to Jakarta fear a repeat of 1994, when tight US policies set the stage for a regional crisis a few years later.
Asia should welcome higher US rates, for the pluses could outweigh the minuses.
Over the next 10 days or so, expect a raft of stories exploring the lessons from Thailand’s baht devaluation. That July 2, 1997 act made Bangkok patient zero of a contagion that spread to Indonesia and South Korea on its way to Wall Street. But Asia sprang back to life too quickly for its own good, thanks to a booming US economy. If the Fed’s over-tightening in the early 1990s slammed Asia, its easy-money experiments at the end of that decade saved it.
That also happened in 2008, when the Fed responded to the Lehman crash with the shock and awe of quantitative easing. Again, Fed liquidity reduced the urgency for Thailand to cut runaway debt, for Indonesia to address graft and for South Korea to curtail its conglomerates. It took pressure off Malaysia to separate the public and private sectors, the Philippines to level playing fields and India to open protected sectors. It allowed Japan and Singapore to muddle along rather than take on vested interests. It deadened China’s resolve to re-engineer growth and Hong Kong’s courage to diversify its economy.
Yellen’s moves could help Asia in two ways. One, the resilience of Asian markets after four Fed rate increases shows how different a place this region is 20 years on. Financial systems are stronger, governments more transparent, currency reserve defences more plentiful.
Two, the Fed’s trajectory means complacency is no longer an option. The pressure is now on officials in Jakarta, Manila, Kuala Lumpur and Seoul to make greater space for private-sector innovation. Tokyo can’t continue riding the coattails of Western central bankers. The same goes for President Xi Jinping (習近平), who’s dined out on Fed excesses since 2012. Nothing would hasten development faster than putting the private sector in the driver’s seat and curtailing the state.
Things could go awry, of course. With inflation pressures few and far between, Yellen could overdo things. But this Fed understands what the Bank of Japan still doesn’t 20 years on: turning businesses and entire Asian nations into monetary addicts has its dangers. As Yellen mops things up at her end, Asia has a unique opportunity to get things right this time.
William Pesek is a Tokyo-based journalist and the author of Japanization: What the World Can Learn from Japan’s Lost Decades. Twitter: @williampesek